Wyoming, South Dakota Top List of States with Best Tax Climate

Wyoming has the nation's best tax climate for businesses, while Rhode Island has the worst, according to a new study.

The study, conducted by the Tax Foundation, a nonpartisan research group based in Washington, focused on five major areas: income taxes, business taxes, sales taxes, unemployment taxes, and property taxes.

The rankings consider not only on how high taxes are, but also on how they are implemented. According to the study's authors, a good tax system levies low, flat rates across a broad base, treating all taxpayers the same.

A system that unevenly taxes different industries, on the other hand, is less favorable, because it makes it less likely that business decisions will be made in response to market forces.

Top-ranked Wyoming was followed by South Dakota, Alaska, Nevada, and Florida. Wyoming, Nevada, and South Dakota have no corporate or individual income tax; Alaska has no individual income or state-level sales tax; and Florida has no individual income tax.

"A state that raises sufficient revenue without one of the major taxes will, all things being equal, out-compete those states that levy every tax in the state tax collector's arsenal," co-authors Curtis S. Dubay and Chris Atkins wrote.

Rhode Island, with the unfortunate distinction of having the worst overall tax system for business, had the worst unemployment tax system, the worst property tax system, and the third-worst individual income tax system. Other poorly ranked states included Ohio, New Jersey, New York, and Vermont.

A assortment of issues -- from customer proximity to the labor pool's level of education -- is important when considering where to set up shop, according to Dubay and Atkins. However, they maintained that understanding how a company will be taxed is especially important.

"Not all tax systems are created equal," they wrote. "States must strive for tax systems that are economically neutral and systems that promote economic growth."